Appraisers Claim Fed's Regulation Undermines the Profession

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As if appraisal management companies, readily available automated valuation models and broker priced opinion options were not enough challenges to the real estate appraisal profession, well-intended federal and state regulations are generating new controversy.

It is a matter of life or death for appraisers trying to overturn conflicting regulation adopted by the Federal Reserve Board through a petition that alleges a Fed rule adopted in 2011 “threatens the viability of professional appraisal practice and undermines the legitimacy of real estate appraisals” and is contrary to the Dodd-Frank financial reform law.

In an effort to protect appraisers’ independence from appraisal management companies the American Guild of Appraisers sent the petition to the Federal Reserve Board and the Consumer Financial Protection Bureau.

Furthermore, the guild hints that unless the issue is addressed a lawsuit will follow. “Suing the Federal Reserve is not something that the appraisal industry would do lightly, but there may be no other option,” stated the guild’s president, Peter Vidi.

Last year the Fed adopted a rule that according Vidi allows appraisal management companies that control up to 80% of residential appraisals to forego Dodd-Frank compensation recommendations and reduce appraiser fees by 50% or more below the prevailing rates.

Through Dodd-Frank Congress has already recognized that inadequate appraisals resulting from undue pressure on appraisers were a contributing factor to the poorly underwritten subprime loans and the foreclosure crisis. The lawsuit maintains that the Fed’s rule exacerbates the same problems Dodd-Frank sought to address once again making the reliability of residential real estate appraisals “subject to question.”

Most insiders agree that property valuation is the corner stone of the mortgage industry. Dodd-Frank enacted a series of appraisal reforms to ensure appraiser independence and accountability. It requires that appraisers be paid “reasonable and customary fees” in response to data indicating appraisal management companies “have been pressuring appraisers to accept assignments with unreasonable requirements and unreasonably low fees.”

Dodd-Frank specifically prohibits basing fees on the current AMC practices, Vidi said, so the petition is seeking to overturn a rule that lowers appraisal costs for AMCs to the expense of appraisers but does not save a penny to borrowers.

What borrowers do not know is that probably less than half of the fee they pay is actually going to the appraiser, Vidi said, enabling AMCs, which often are owned or controlled by lenders, to “make big profits.” In addition, according to Vidi, appraisal management firms pressure appraisers “to meet unreasonable deadlines” and even condition work on an appraiser’s willingness to compromise the integrity of the appraisal process.

Vidi joins other insiders who see the practices of AMCs as a threat to the reliability of the appraisal process and the integrity of appraisers, many of whom may choose to leave the profession.

Profits at stake for the AMCs and their owners, Vidi says, are at well over $100 million annually.

Matt Schneider, one of the guild’s lawyers, stated that while the guild hopes the Fed and the CFPB, which is specifically charged with protecting customer interests, “will re-examine this rule and make the changes necessary to carry out the intent of the law,” appraisers have a strong legal case that the Fed has violated the Dodd-Frank law.

The petition also alleges the Fed failed to comply with the law by not providing an opportunity for public comment on the proposed rule—which did not allow the over 1,400 comments the Fed received after the rule was adopted to be taken into consideration.